IRS vs. Crypto: 5 Essential Tips to Avoid IRS Audits and Tax Penalties | Gordon Law Group (2024)

FAQs

What triggers IRS audit crypto? ›

Crypto-specific activity that might trigger an audit includes: Failure to accurately report crypto transactions and income. Large transactions or significant gains. Inconsistencies or discrepancies.

In order to claim a loss, you will need to have made a crypto taxable event on the asset. This means selling, trading for another crypto, or spending crypto. Otherwise, the loss remains unrealized and cannot be reported as a capital loss.

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

Can you get audited for cryptocurrency? Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit.

2024 is the most important tax year for crypto investors to be reporting. For 2024, you still need to collect crypto data and properly report activity, including your cost basis. Starting in 2025, the IRS will have a "firehose of information" to verify whether past reporting was accurate, Gordon said.

Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap. Some peer-to-peer (P2P) platforms. Exchanges based outside the US that do not have a reporting obligation under US tax law.

WASHINGTON — The Internal Revenue Service today reminded taxpayers that they must again answer a digital asset question and report all digital asset related income when they file their 2023 federal income tax return, as they did for their 2022 federal tax returns.

The IRS receives copies of your W-2s and 1099s, and their systems automatically compare this data to the amounts you report on your tax return. A discrepancy, such as a 1099 that isn't reported on your return, could trigger further review.

What are the 10 red flags in the IRS audit? ›

Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts, tax experts say.

Who Is Audited More Often? Oddly, people who make less than $25,000 have a higher audit rate. This higher rate is because many of these taxpayers claim the earned income tax credit, and the IRS conducts many audits to ensure that the credit isn't being claimed fraudulently.

US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.

You can send any of your crypto between your personal wallets without paying any taxes; Even if you don't sell any of your crypto, you'd still need to answer the crypto question on Form 1040, including reporting your crypto income in your income tax return.

This deduction is limited to $3,000 each year, or $1,500 if you are married filing separately. Losses above $3,000 will be separated back into short-term and long-term, and they will be carried over into the next tax year. Those losses are then netted against the following year's gains until they get used up.

Like many audits, cryptocurrency audits typically occur because the IRS has reason to believe you didn't report all your taxable income, and therefore didn't pay enough taxes. Some audits are also conducted randomly.

Unreported Income

Taxable income that is not reported on your tax return is likely to trigger an IRS audit. Common kinds of unreported income include: Income from a hobby or side hustle.

You must report income, gain, or loss from all taxable transactions involving virtual currency on your Federal income tax return for the taxable year of the transaction, regardless of the amount or whether you receive a payee statement or information return.

While the odds of an audit have been low, the IRS may flag your return for several reasons, tax experts say. Some of the common audit red flags are excessive deductions or credits, unreported income, rounded numbers and more. However, the best protection is thorough records, including receipts and documentation.